Price models – how do suppliers set prices?

Most buyers are very interested in getting a fair price deal with their suppliers. The product and service should not be over priced, neither under priced. In this article we discuss different price models the suppliers and you could use.

First, what is in the price? The suppliers could price their products and services in many different ways:

Cost plus price

Calculated the sum of all variable and fixed cost drivers plus a percentage to cover profit and overhead

The cost plus price probably ignores the market forces

The cost price model could drive inefficient manufacturing and high overhead

Historical price

Historical prices often has en index linked percentage added each year

Probably ignores the market forces

Probably doesn’t reflect the supplier’s costs

Market price

Risk for cartels leading to high prices

Does probably not reflect the cost

Will probably vary as the market changes

The price is set in line with what the market is prepared to pay

Special price

Probably a one time deal for a special offer

Can be artificially low or high due to the supplier’s or buyer’s needs

Penetration price

Usually has price reductions to increase the volumes followed by steady price increased

Often used by the suppliers to increase market share or penetrate a new market

Premium price

A very high price not related to the cost

Often used in scarce supply situations and the product is highly differentiated from competition

brand marketing is driving this price model

Regulated price

Set by the government and beyond the supplier’s control

List price

Published in price list

Discount often apply

Could manipulate the buyers to think they got a good deal when they get a discount on an already high price

The price model is motivated by the following parameters: Value, cost, budget, competition and opportunity.

Value: the worth for the customer of the goods or services compared to the paid price

Cost: the actual investment in material, labour and overhead needed to produce the goods and services

Budget: the amount of money available for the purchase

Competition: rivals between different suppliers wanting to sell in the same market place

Opportunity: a combination of circumstances leading to an improved result when buying the product or service

So what is the price? Price is a policy, cost is a fact. A buyer can use the knowledge of different price models buy accepting the propose price model and negotiate with help of competition or make counterproposals in other price models.